On March 16th, 2023, The Financial Conduct Authority (FCA) issued a “Dear CEO” letter to all authorized and registered payment companies in accordance with the Payment Services Regulations 2017 and the Electronic Money Regulations 2011. The letter was framed around three core outcomes payment firms must achieve:
- Ensuring customers’ funds are safe.
- Ensuring the firm does not compromise the financial system’s integrity.
- Meeting customers’ needs.
FCA suggested the following priorities for payment companies:
Priority 1: Safeguarding
Priority 2: Money Laundering & Sanctions
Priority 3: Fraud
FCA also identified three cross-cutting priorities to underpin the three outcomes described above:
1: Environmental, Social, and Governance (ESG) & diversity and inclusion
2: Operational Resilience
3: Regulatory reporting
Implications on Financial Institutions
It’s interesting to note that the FCA specifically mentioned alert backlogs in its message. Financial Institutions (FI) will now have to collaborate with customers to implement machine learning algorithms that can help them classify alerts according to the risk each one poses. It would help FI’s to improve customers’ risk-based strategy; while ensuring analysts’ time is effectively used throughout the institution.
Being network-driven is another practice that FCA has recommended. For complex fraud cases that are the product of a single perpetrator, legacy systems must prioritize screening and keep an eye on the particular person. As a more efficient approach, AI would be used to find connections between accounts to know if it is connected to a person or an organization. This would assist customers while understanding the true scope of the issue.
Implication on Customers
Fraud has a significant negative societal and psychological impact on people, organizations, and society. The victims of fraud, and their families, caretakers, & communities, go through a traumatic experience that has lasting effects. Fraud frequently affects those who depend on government services (such as the elderly, the frail, the ill, and the impoverished) the most. These individuals suffer terrible consequences because of fraud, exacerbating their disadvantage, vulnerability, and inequality. Fraud results in missed chances for people and businesses.
The FCA is dedicated to ensuring that customers are safe from financial harm and have fair and transparent access to financial goods and services. This entails an emphasis on the prevention of misselling & scams and encouraging ethical lending practices. The practice would enhance the customers’ self-security, confidence, and trust.
Changing the Global Regulatory Regime
Regulations in the compliance area are expected to have a significant effect in 2023 with almost equal vigor. With the passage of the Best Interest Rule (Reg BI) in 2019, the United States changed how securities were regulated and strongly emphasized on safeguarding consumers. The obligations facing compliance departments in the EU are distinct but complicated. There are compliance issues regarding the conflict between Russia and Ukraine. This arises the need for financial institutions around the globe to implement, enforce, and keep an eye on sanctions.
The FCA concluded its larger strategy for 2022–25 with a strong emphasis on the reduction and prevention of financial crimes. A commitment to act “earlier and more assertively in dealing with problem firms” was a key factor for this strategy. According to the statement, organizations that cannot or will not meet the standards will be removed or sanctioned.
The FCA’s objectives for 2023 focus on ensuring that the UK financial sector remains innovative, stable, and competitive while advancing customer protection. The FCA, dedicated to promoting sustainable finance and upholding the integrity of financial markets, is taking a proactive approach to the challenges presented by new technologies and shifting customer behaviors. In light of scams and fraud happening worldwide, FCA has identified some possible risks that possess regulatory information services (RISs) and has outlined expectations for mitigating the risks.
In conclusion, we observe the FCA’s repeated desire for board involvement and influence in the fraud management areas. The current difficult market conditions may have influenced its intention. The FCA believes that the financial sector lags behind others because of its poor conduct & culture and the repetition of several themes from its flawed 2019 letter. We think businesses in this industry should be ready for future interventions by FCA. Businesses should consider how they would demonstrate the changes FCA wishes to see for better sustainable business.
Author: Vaishali Moitra, Research Analyst in Quadrant knowledge solutions.